The Two Paths To Financial Independence

byEmilyonMarch 19, 2015

I’ve heard “financial independence” defined in at least two different ways. Heretofore when I write about it, understand that I tend to adhere to the standard definition, of coming to a place in your life where you have a large enough nest egg that it can provide for your desired standard of living whether or not you do anything else to try to earn an income.

In other words, your money makes you money – and enough of it to not only pay your bills, but allow you to have some fun, as well.

There are two paths to get to financial independence. I offer them to you now, as well as the advantages and disadvantages of each path.

The main advantage to this path is that it is great for people who don’t have the initiative or motivation to start and maintain their own business. The major disadvantage is that it takes longer to reach financial independence with this path. The less income you make, or the more people there are in your household to whom the income must go, the longer it takes to reach financial independence.

The multiple streams path

With this path, you have at least two streams of income coming into your household. You live on one, and the others are invested. You can live frugally with this path, if that’s your bent, but you don’t have to. The point with this path is that the primary income, the one you live off of, goes beyond meeting your needs. The secondary income goes into your nest egg.

This income may come from both spouses working and the lesser income is used for building the financial independence fund. Or, you may have a business (or three) on the side in addition to your day job, such as direct sales, flipping websites, or publishing books to Kindle. Or, if you’re married, you work a day job and your spouse works a micro-business.

The big advantage this path has over the frugal path is that, unless you have a bunch of kids, you don’t have to scrape together pennies every month. You have a lot of extra money. Because you do, you reach financial independence much more quickly than going down the frugal path.

In addition, if you choose to start a business over taking on a second job – and choose the right business model – then learn how to market correctly and spend enough time on marketing, you will eventually find that you are earning more and more income for the same amount of work.

The disadvantage of this path to financial independence is that it can be more stressful. Perhaps the wife wants to stay home with the kids. Or in order to build an eBay business, you have to stay up late every night and you don’t want to have to come home from your day job and work on a business.

The best of both worlds

I believe in living frugally because it represents good stewardship over the planet. When you live frugally, you produce less waste which leads to a happier Earth.

However, I don’t expect everybody to go to the extremes that my husband and I have. And you can certainly achieve early financial independence without doing so – we could have stayed in our high-property-tax, energy-sucking suburban house and still been financially independent.

So how about merging the two paths described above? At least live below your means as you work a day job, then spend an hour or so during the evenings and three to four hours on the weekend building some sort of online business. Unless you’re going to sell stuff on eBay, starting a business online requires very little overhead and no inventory. This is a low-stress way to add a second stream of income to your main stream. If you keep at it, the income from your home business may eventually exceed that of your day job and allow you to quit it.

Just remember: except what you need to pay income tax, sock away all the profit from this side gig so that you can build your nest egg as fast as you can.